Should I pay ERC of £10500?

Orchid96

Hi All,

Our current mortgage is around 530K with monthly payment of £1935 (rate 1.24%).

Like many others we too are feeling the heat of rate increase, hence managed to get an offer from Barclays in mid July at 3% fixed for 10 years.

The offer is valid until mid Dec, so we are trying to find the best option.

Current mortgage 2 year fixed term ends in Feb 2024, with an ERC 2% (roughly £10500 if we switch before Feb-23).

ERC will be added to the new mortgage, the new payment will be £2440 and we can afford the additional payment of £500. 

If we switch in December this year, we will have additional cost of almost £21K including the ERC (paying higher rate of 3% instead of 1.24% from Dec-22 to Feb-24)

BoE already announced recession starting in October, but at the same time the inflation is still going up.

We are worried if the rates are close to 4.5 to 5% in Feb-24, the monthly payments will go upto £3500. 

The options for us:-

1. Switch to new product in Dec-22 and pay ERC of £10500. If the rates come down in 2/3 years, we won't be able to switch as Barclays ERC is quite high - 5% throughout the fixed term.

2. Stay on the current product & save the additional payments. Move into a tracker in Feb-24 (if fixed rates are quite high) and use the savings to cover the additional payments.

Hopefully the recession will bring down the interest rates if not in 2024, at least before end of 2025 but it is all a guess at the moment. 

What will you choose if you were in this situation?

alanyau88

Option 2 by far. 

Why would you want to pay such extensive penalty charges just for peace of mind?  You can do a lot better by looking for another mortgage now for you to re-mortgage in February 2023.  

dimbo61

You have the Barclays offer secured and a few months to make a decision.
Does the ERC drop to 1% after Feb 23?
See what deals you can find and can secure 6 months in advance !
Now normally I would say No Way should you pay £10,500 ERC and a higher rate for the next 10 years but we know Nothing about you and your family/ circumstances?
That is a big mortgage and your a higher rate taxpayer ( how else can you borrow £530K ) 
All down to what risk you want to take 
10 year fix at 3%
PS now paying 4.74% with Barclays but our circumstances are completely different to yours 

thegentleway

I def wouldn’t pay £10k ERC in those circumstances.

Orchid96

Thank you @alanyau88, @thegentleway for the replies.
@dimbo61, yes the ERC drop to 1% after Feb-23, but to compensate that I need to get an offer around 2.85% which is quite unlikely with the way BoE raising the rates to curb inflation.
As you mentioned it is a big mortgage hence we are thinking of paying the high ERC to secure the home for next 10 years.
We have time until December to make the final decision

alanyau88

As dimbo61 said you can hunt for a rate now and lock it in so that in February you re-mortgage on that rate. 

Your current rates of 1.24% fixed for 2 years is really good and if I were you, I would definitely pick option 2.  Like you said, you can make up the difference from your savings and I suspect you will save a lot more that way.

Orchid96

Thank you @alanyau88. Almost all the rates available are now 3+. ERC will come down to 1% (still will be around £5250) in Feb-23. If we are fixing for 10 years, we should get a rate for less than 3.15% to match with current rate of 3% with ERC of 2%. We are looking at 10 year product as kids will finish the school by that time. We can move from the current home after that based on the situation. 

london21

The banks are cahsing in with the ERC.

The ERC is a lot of money, no one knows what the rates will go up to.

You have some time to decide but painful with 10k ERC

id311299

london21 said:

The banks are cahsing in with the ERC.

The ERC is a lot of money, no one knows what the rates will go up to.

You have some time to decide but painful with 10k ERC

It is relatively small pain now vs potentially catastrophic pain in the near future. Similar to going to the dentist, or taking insurance.

Compared to the value of the assets at stake (your house and your sanity), £10k looks like small potatoes - especially if it is affordable without major sacrifices.

Orchid96

id311299 said:

It is relatively small pain now vs potentially catastrophic pain in the near future. Similar to going to the dentist, or taking insurance.

Compared to the value of the assets at stake (your house and your sanity), £10k looks like small potatoes - especially if it is affordable without major sacrifices.

ERC will be added to the new mortgage, so it is a relief. New mortgage payments are going up by around £500, but we can manage with that.

The only worry is about the rates going very high and stay there for few years :-(

I know this is the price for peace of mind, so at the moment we are thinking of switching. Got 2-3 months to think over this.

FarmGirl78

My back of envelope scribbles tell me that if you switch NOW you'll pay an EXTRA £19,035 between now and Feb '24.

If you stick with your 1.24% and rates go up to your predicted 5% then when you go into the standard variable rate in Fen '24 that £19k would cover the increase in mortgage payments another 12 months to Feb '25.

Assuming I've not missed anything or added up wrong then this way of looking at things might give you a bit of food for thought. I'd rather chance my arm and ride it out. (Mind you, I said this about gas prices and am heavily kicking myself right now!)